India Opens Door for Return of Digital Payment Fees

The Indian government has proposed amendments to the Payment and Settlement Systems Act that could pave the way for the return of merchant discount rate (MDR) on select UPI transactions. While no final decision has been taken, the move could create a sustainable revenue model for banks and fintech firms while keeping digital payments free for consumers and small merchants.

India has moved a step closer to reintroducing merchant discount rate (MDR) on select Unified Payments Interface (UPI) transactions after proposed amendments to the Payment and Settlement Systems Act were introduced in Parliament. The legislative changes create a legal framework that would allow the government to levy merchant fees on digital payments, although no final decision has been made on the fee structure or implementation timeline.

UPI, one of the world's largest real-time payment systems, processed 23.6 billion transactions worth ₹29.9 trillion in July 2026, highlighting its dominant role in India's digital payments ecosystem. Currently, merchants are not charged any MDR on UPI transactions, unlike credit and debit card payments, where processing fees are applicable. Industry stakeholders have argued that the zero-fee model has made it difficult for banks and payment service providers to recover infrastructure and operational costs.

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According to industry and regulatory sources, policymakers are evaluating two possible approaches. One option is to impose MDR only on transactions above a specified value, while another proposes charging fees based on a merchant's annual turnover. A leading proposal under consideration suggests an MDR of 0.3% to 0.5% on UPI transactions exceeding ₹2,000 for merchants with annual turnover above ₹1.5 crore, while keeping payments free for consumers and small businesses.

Analysts believe the proposed change could create a sizeable revenue opportunity for the digital payments industry. According to brokerage estimates, higher-value transactions account for only a small share of payment volumes but contribute the majority of transaction value. Reintroducing MDR on these transactions could generate ₹5,000-10,000 crore annually, benefiting banks, payment processors, and fintech companies by supporting continued investment in payment infrastructure, cyber security, and innovation.

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The proposal reflects the government's efforts to balance rapid digital payment adoption with the long-term sustainability of the ecosystem. While UPI has transformed retail payments by offering free, real-time transactions, industry participants have consistently sought a revenue-sharing mechanism to offset rising operational costs. Officials have clarified that the legislative amendment only enables the possibility of introducing MDR, and any final decision on its scope or rates will be taken separately after further consultations.